AFAR 1: PARTNERSHIP FORMATION

EXERCISE PROBLEMS
PROBLEM 1.
AK and BK decided to form a partnership on October 1, 2014. Their Statement of Financial
Position on this date were:

AK Bk
Cash 65,625.00 164,062.50
Accounts Receivable 1,487,500.00 896,875.00
Merchandise Inventory 875,000.00 885,937.50
Equipment 656,250.00 1,268,750.00
Total 3,084,375.00 3,215,625.00

Accounts Payable 459,375.00 1,159,375.00

AK, Capital 2,625,000.00
BK, Capital 2,056,250.00
Total 3,084,375.00 3,215,625.00

They agreed the following adjustments shall be made:

 Equipment of AK is underdepreciated by P87,500 and that BK is overdepreciated by

P131,250.
 Allowance for doubtful accounts is to be set up amounting to P297,500 for AK and P196,875
for BK.
 Inventories of P21,875 and P15,312.50 are worthless in the books of AK and BK
respectively.
 The partnership agreement provides for a profit and loss ratio of 70% to AK and 30% to BK.
Assuming the use of transfer of capital method, how much is the agreed capital of AK to bring
the capital balances proportionate to their profit and loss ratio.
A. P2,390,937.50 C. P2,218,125.00
B. P2,935,406.25 D. P1,024,687.50
PROBLEM 2.
On January 1, 2014, AB and QR agreed to form a partnership. The following are their assets
and liabilities:

Accounts AB QR
Cash 136,000 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000
AB decided to pay off his notes payable from his personal assets. It was also agreed that QR
inventories were overstated by P24,000 and AB machinery was over depreciated by P20,000.
QR is to invest/withdraw cash in order to receive a capital credit that is 20% more than AB’s
total net investment in the partnership.
How much cash will be presented in the partnership’s statement of financial position?
A. P486,400 C. P450,400
B. P410,400 D. P274,400
PROBLEM 3.
On December 1, 2014, MV and CD agreed to invest equal amounts and share profits equally to
form a partnership. MV invested P3,120,000 cash and a piece of equipment. CD invested some
assets which are shown on the next page:

Book value
Accounts Receivable 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000

The assets invested by CD are not properly valued, P32,000 of the accounts receivable are
proven uncollectible. Inventories are to be written down to P1,040,000. Included in the
machineries is an obsolete apparatus acquired for P384,000 with an accumulated depreciation
balance of P336,000. Part of the intangibles is a patent with a carrying value of P56,000 which
was sued upon by a competitor. CD unsuccessfully defended the case and the final decision of
the court was released on November 29, 2014.
What is the fair value of the equipment invested by MV?
A. P1,400,000 C. P1,344,000
B. P968,000 D. P1,560,000
PROBLEM 4.
On December 1, 2014, MG and AN are combining their separate businesses to form a
partnership. Cash and noncash assets are to be contributed. The noncash assets to be
contributed and the liabilities to be assumed are as follows:
MG AN
Book value Fair value Book value Fair value
Accounts Receivable 250,000 262,500 200,000 195,000
Inventory 400,000 450,000 200,000 207,500
PPE 1,000,000 912,500 862,500 822,500
Accounts Payable 150,000 150,000 112,500 112,500

MG and AN are to invest equal amount of cash such that the contribution of MG would be 10%
more than the investment of AN.
What is the amount of cash presented on the partnership’s statement of Financial Position on
December 1, 2014?
A. P2,762,500 C. P5,525,000
 B. P2,512,500 D. P5,025,000

PROBLEM 5.
Sarah and Theo decided to form a partnership on May 1, 2016. Assets contributed by the
partners are:

SARAH THEO
Book Value Fair Value Book Value Fair Value
Cash P375,000 P375,000 P875,000 P875,000
Merchandise Inventory 95,000 125,000
Furniture and fixtures 350,000 312,500 872,500 937,500
Transportation equipment 3,262,500 2,812,500

The transportation equipment is subject to a mortgage loan of P1,125,000, which is to be

assumed by the partnership. The partnership agreement provides that Sarah and Theo share
profits and losses of 30% and 70%, respectively.
Assuming that the partners agreed to bring their respective capital in proportion to their profit
and loss ratio, using Theo capital as base, how much additional cash is to be invested
(withdrawn) by Sarah?
a. P(687,500) c. P875,000
b. P(987,500) d. P687,500

PROBLEM 6.
Abraham and Sarah formed a partnership. The following are their contributions:

ABRAHAM SARAH
Cash 800,000
Accounts Receivable 400,000
Inventory 640,000
Land 400,000
Building 960,000
Total 1,840,000 1,360,000

Note Payable 480,000

Abraham, Capital 1,360,000
Sarah, Capital 1,360,000
Total 1,840,000 1,360,000

Additional information:

 Included in the accounts receivable is an account amounting to P160,000 which is

deemed uncollectible.
 An unpaid mortgage of P80,000 on the land is assumed by the partnership.
  The building is under depreciated by P200,000.
 The building also has an unpaid mortgage amounting to P120,000, but the mortgage is
not assumed by the partnership. Sarah agreed to settle the mortgage using her personal
funds.
 The note payable is stated at face amount. A proper valuation requires the recognition of
a P120,000 discount on note payable.
 Abraham and Sarah shall share profits and losses 60% and 40%, respectively.
If the partners agree that their capital balances be proportionate to their respective P&L ratios,
how much is to be invested by Abraham if Sarah’s Capital will be the basis?
a. P200,000 c. P300,000
b. P400,000 d. P600,000